TRADE LIBERALIZATION AND UNEMPLOYMENT: POLICY ISSUES AND EVIDENCE FROM CHILE

This paper explores the link between trade liberalization and unemployment, focusing in what has arguably been one of the most dramatic trade liberalization episodes in modern times: the Chilean trade reform of the 1970s. In little more than three years a protective structure characterized by high and dispersed tariffs averaging more than 100%, and QRs protection that covered virtually every import item, was replaced by a uniform tariff of 10 percent. Furthermore, Chile began this trade liberalization processes with a system of strict job security legislation and heavy government intervention in industrial relations, and labor market reforms were implemented on the way. Earlier studies had found weak links between aggregate unemployment levels and trade liberalization, and have suggested a link between trade liberalization and unemployment that depends on institutional factors. This particular case study adds to the same body of evidence as it shows that individual experiences with unemployment, and particularly with long duration, are moderately affected by trade liberalization, and the marginal effect declines through time. In the case of Chile, labor market reform trailed trade liberalization by a few years and the speed of job creation and job destruction increased significantly after labor reforms. This is one possible explanation behind the decline in the relative impact of deprotection on the probability of remaining unemployed relative to the impact of individual characteristics such as potential experience.